How Will the Increase in Federal Interest Rates Impact SaaS?
The U.S. government uses federal interest rates to regulate monetary matters when economic issues strike. Find out in this blog post how this affects SaaS businesses.
The U.S. economy continues to experience a series of downturns. These issues include economic recession, inflation, the Russia-Ukraine war, etc. As these issues arise, the U.S. government regulates cash flow & other financial issues. Mind you, these economic failures often negatively impact SaaS success, startups, & small businesses throughout the continent.
Therefore, the FOMC (Federal Open Market Committee) takes prompt action to curb these challenges. This action covers adjusting federal interest rates, preventing money from being cheap. This blog post will discuss how the increased federal interest rate affects SaaS companies.
Federal Interest Rates Are Increasing?
Yes, federal interest rates are increasing, and it is not the first time. At the last FOMC meeting, the board said it would keep raising the rates. The FOMC began to set the funds rate from the 90s till date. In March 1980, the U.S. witnessed a double-digit rate of 14.6% as the FOMC strived to fight inflation. At the end of the year, the committee reduced the rate to 0.25%.
In 2007, the rate moved from 5.02% to 5.17%. At the last 2022 meeting the committee held on December 13-14, the rate has now changed from 4.25% to 4.5%. This rate will affect the banking sector, entrepreneurs, small businesses, and SaaS companies.
The cost of bank borrowings, credit card borrowings, personal borrowings for mortgages, vehicle purchases, etc., will now rise. Also, the increased federal rate will also make consumers spend less. Businesses or individuals who cannot afford the new rate will have to source for other strategic alternatives to finance their projects. It would also help them to rethink the projects they are trying to finance.
For example, the rate a person would pay back on a car loan in the past now differs from what it is today. Let’s say a person wants to buy a car for $43,000 at 3% interest for 20 years. This means the interest will be lower than it is now that the user has to pay 4.5% interest on the same car brand and model.
The new rate and the unanimous policy set by the body have taken effect as of December 15, 2022. Henceforth, the Open Market Desk at the Federal Reserve Bank of New York will conduct market operations by maintaining the new 4.5% rate. The body will only lend overnight funds not more than $500 billion. If there’s a need to increase the limit, the federal reserve chairman alone can grant it.
Similarly, the Open Market Desk should charge 4.3% for overnight reverse repurchase agreements. Per-counterparty transactions should not exceed $160 daily. The chair alone can grant a temporary increase when necessary.
Also, the policy allows a rollover at auction of principal payments from the Federal Reserve’s holdings. Similarly, principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities (MBS) should be reinvested into the MBS. This should happen when the principal payment received exceeds $35 billion monthly. In addition, the Open Market Desk should allow moderate adjustments of the $35 billion reinvestment. The Desk could use dollar roll and coupon swap for MBS transactions.
How do the Increasing Federal Interest Rates Impact SaaS Businesses?
When interest rates rise, everyone’s money will be affected – customers, businesses: small businesses, enterprises, and SaaS companies. Nobody goes unscathed. Everyone’s financial strength to make purchases, borrow, reinvest, or run their businesses is tampered with. Hence, we shall discuss how the increasing federal interest rates affect SaaS businesses.
- Reduced Consumer Income & Spending
As established earlier, increased federal interest rates affect SaaS & other businesses and customers. Business owners would have to reduce the number of debt financing sources they have. Once they pay up their debts, it would be nearly impossible to source for other debt financing solutions. Instead, they would look for ways to generate revenue, which might take some time to yield.
In the process, they would cut all costs, including laying off some workers. These workers who subscribe to SaaS for certain tasks might stop. Companies might have to handle operations manually, thereby preventing SaaS companies from earning for some time. On the other hand, these customers might opt for cheaper or free plans. So, when many SaaS customers return to free plans (without considering their limitations), things will be financially rough for SaaS businesses.
In cases of economic falls, consumers’ good credit scores wouldn’t stop them from experiencing limited spending. The funds they can borrow from their banks will reduce due to high-interest rates. As a result, many customers would have to put a pause on the number of SaaS they subscribe to. If a company subscribes to 5 SaaS, it might reduce them to 2. This further means that SaaS businesses will record low sales.
- Limited Business Growth
Growing becomes a struggle for SaaS companies in the face of high federal interest rates. When the federal interest rate is high, SaaS companies cannot develop new products or markets. Likewise, they cannot diversify their products or get partners as they did previously. Investing in advertising or business PR becomes nearly impossible as well. Why? This is because they cannot access available funds due to high payback rates.
- Generating Revenue is Tough
Now that debt has become even more expensive; SaaS businesses will begin to look for alternatives. A major profitable alternative is generating revenue instead of taking out loans, seeking investors, or venture capitalists. However, developing strategies to make money might be easy, but getting the funds might be difficult. For instance, if a SaaS company decides to sell more to existing customers or raise their prices, it wouldn’t work out fine.
SaaS companies contribute immensely to the growth and success of other businesses. However, the SaaS sector and other businesses suffer huge financial consequences when the government makes a decision like raising federal interest rates. When this happens, it causes businesses to pay more to access needed funds. At Intrepid Finance, we can provide growth capital by bypassing the traditional tedious typical bank and venture financing process. To access growth capital and become a huge SaaS success, reach out to us today.